Road to prosperity
Underdeveloped infrastructure has become a major drag on Indonesia’s economic growth. Unsurprisingly, one of the first reforms by President Jokowi was eliminating the fuel subsidy program. By switching from idle spending to productive spending, Jokowi has secured fiscal flexibility to implement his reform agendas, in particular, infrastructure projects that will spur economic growth. The government has increased its infrastructure budget, and President Jokowi has rolled out a number of economic packages and presidential decrees aimed at reducing bottlenecks and helping to expedite construction of government projects, including toll roads.

Short-term remains challenging…
As the capex cycle is in expansionary mode, we believe that Jasa Marga (JSMR) still needs to escalate its leverage position. As long-term debt increases, we expect to see higher gearing level in FY17F. We also anticipate its debt-to-equity ratio to continue to climb, as we expect the company to secure financing via syndicated bank loans and/or bond issuance, on top of other announced financing schemes.
Our back-of-a-napkin calculation shows that JSMR could deploy around IDR65tr of total capex for fifteen new routes. Furthermore, pressure on the firm’s bottom-line is inevitable, as we expect to see higher interest burden. We do not expect the company to book a net loss, however, as its topline growth will stay robust on the back of bi-annual tariff adjustment and new routes commencement. Nonetheless, negative bottom-line growth seems plausible, in our view.

… but the future looks promising (if solid strategies are implemented)
During the current expansionary period, JSMR will rely on the bi-annual tariff hike scheme and new routes to drive its topline. Ergo, well-planned financing schemes and prudent cost control will act as imperative buffers to absorb extraordinary expenses. If the strategies can be implemented effectively, we are optimistic about the future of the company, as route additions will act as a positive catalyst for JSMR’s growth in the long run.

Attractive long-term prospect despite short-term challenges
All in all, we believe that JSMR’s capex expansion would prove fruitful in the long run, as construction of new toll roads will drive revenue growth in the coming years. However, financing remains a major hurdle for the company. Still, with support from the government, as well as solid financing plans and prudent cost controls, we believe that JSMR will be able to reach its long-term targets and remain the leader in the Indonesian toll road industry. Key risks to our call include: 1) unsupportive government regulations; and 2) higher-than-expected financing costs.

Jasa Marga ($JSMR) aims 2% YoY increase in transaction volume this year compared to 1.36bn transactions in 2016. The management is optimistic the transaction volume could grow in line with an improvement in economic growth. In 2016, the company recorded 1.36bn or grew by 3.8% YoY. Besides that, the company targets revenue of IDR10trn in 2017, up 13.6% YoY compared to IDR8.8trn in 2016. (Bisnis Indonesia)

We visited the Solo-Ngawi toll road located in Central Java. It forms part of the Trans Java Toll road and is regarded as one of the national top priority projects. Initially, the toll road was expected to be operational in 2018. However, given the smooth land acquisition and construction progress, it aims to open the toll road in Oct 2017. We maintain our BUY recommendation with an unchanged TP of IDR3,750 (51% upside). This is as the faster land clearing process would definitely benefit it since Waskita is the country’s second biggest toll road concession holder.

¨ Solo-Ngawi toll road. The project was initiated back in 2009 with a total length of 90km connecting the cities of Solo and Ngawi city. It was first expected to be operational in 2014. The toll road is divided into three sections. The first 20.9km (Kartasura-Karanganyar) was subsidised by the Government using the state budget. The other two sections (Karanganyar-Mantingan and Mantingan-Ngawi) were constructed by Solo Ngawi Jaya (SNJ),previously owned by Thiess Contractors Indonesia (Thiess). However, due to a land acquisition issue, construction was at a standstill. Hence, Jasa Marga ($JSMR) and Waskita KaryaToll Road (WTR), a subsidiary of Waskita Karya Persero (Waskita), took over the concession from Thiess in FY15.The Government now expects the Solo-Ngawi toll road to be completed in FY18. However, given the aggressive infrastructure development boost by President Joko Widodo, the land acquisition has been expedited as a result of the new land acquisition law. The toll road is likely to be opened during the Eid Al-Fitr holiday in 6M17 and fully operational in October the same year. Construction has now reached 51.56% completion and there are only around 50 land plots left to be cleared.

¨ Toll road to support the growth. With a recent concession signing of the Krian Legun di Bunder toll road, Waskita currently has around 15 toll roads, most of which are in complete toll roads. Having said that, we think that Waskita would have the highest earnings visibility ahead. This is as we expect its total orderbook to likely easily hit around IDR120trn in FY17, which is sufficient for its revenue for the next three years. We also think that its imminent plan to divest WTR to Sarana Multi Infrastruktur (SMI) and national pension fund PT Taspen Persero would alleviate its burden on cash flow and balance sheet.

¨ Diminishing land acquisition risk. Given the new land law in early 2015, we see some progress on infrastructure development in Indonesia. While execution of the bill was lacking in the first six months after its issuance, there has been faster progress from the concession owner and Government in clearing the land area for the projects. We saw this during our site visit to the 2x1,000MW Batang power plant (Lower Execution Risk Underpins Positive Outlook)and Solo-Ngawi toll road. The law stipulates that if there are no counter charges from the land owner within 14 days of the submission of the land value appraisal to the court, an execution order would be issued to start construction over that land.

¨ BUY with TP of IDR3,750. Maintain OVERWEIGHT on the construction sector, with Waskita as our Top Pick. As the biggest toll road contractor in the country, itis slated to be a direct beneficiary of the faster land acquisition process. We maintain our BUY call with a TP of IDR3,750, based on 23x FY17F P/E. (Dony Gunawan)

Infrastructure: Jakarta-Cikampek II Elevated toll road has been signed

The Jakarta-Cikampek II Elevated toll-road project owned by Jasa Marga ($JSMR) has been signed and is targeted to be completed in 2019. Moreover, this IDR16tn toll road is expected to relieve traffic congestion in the current Jakarta-Cikampek toll road. (IQPlus.com)

Jasa Marga ($JSMR) is optimistic on booking 2016 earnings higher than the fullyear target. The Company is targeting 2016 bottom line of IDR1.7tn (Bahana: IDR1.7tn), up 21% y-y, while on revenue it targets IDR8.7tn (Bahana: IDR8.8tn), up 14.5% y-y. Furthermore, the 2016 revenue is estimated to come from toll revenues amounting to IDR7.9tn and other revenues of IDR824bn. (Investor Daily)

$JSMR – Jasa Marga projects its revenue (excluding construction revenue) to reach Rp8.7tn in 2016, 14% YoY. Out of the total revenue, Rp7.9tn of which is expected to be derived from toll road revenue. This is expected to be supported from traffic volume that is projected to reach 1.4bn vehicles by end of 2016. While net profit is expected to grow (+)21% YoY to Rp1.7tn in 2016. For 2017, the company targets its toll road revenue to grow (+)7% YoY in 2017 and other revenue to grow (+)105% YoY. Meanwhile, the company also targets net profit to grow (+)16% YoY in 2017. Comment: the Rp8.7tn revenue target and Rp7.9tn toll road revenue target is inline with our assumption in 16CL.

Favorable terms with lenders and contractors during construction phase should be able to support Jasa Marga’s working capital and profitability amid expansion period. We raise 2017F net earnings by 19% due to planned asset monetizing and better cash flow from CPF scheme. Upgrade to BUY with TP of Rp5,175.

Devising a more productive financing scheme. The planned development of 13 new toll roads would increase JSMR’s toll road concession to 1,235km by 2019. We calculate total capex in 2016-19F would reach Rp60tn, almost doubling JSMR’s 2015 total assets of Rp37tn. During this expansion period, JSMR plans to re-introduce the Contractor Pre Financing (CPF) scheme to improve its cash flow and reduce needs for borrowing additional debts. Note that JSMR has secured agreements with contractors of its new toll road projects (i.e. Balikpapan-Samarinda, Batang-Semarang and ManadoBitung) to defer payment until completion. By freeing up a much needed cash flow, we expect JSMR should be able to support the government’s effort in connecting cities through toll road network.

Monetizing existing assets.JSMR also plans to increase its cash assets through sales of existing toll road stakes. In 2017, we expect the company would offload its stakes in minority toll roads (e.g. Jakarta Lingkar Barat Satu – 19% stake) while reducing stake in majority-owned toll road (e.g. Trans Marga Jateng – 74% stake). Combined with the impact from CPF scheme, we have decided to raise our 2017 net earnings by 19%, continuing solid 18% y-y net profit growth in 2016F. It is worth noting that JSMR is on-track to achieve our 2016F target with 9M16 net profit of Rp1.3tn (+36% y-y, 74% of FY target) and Rp6.5tn sales (+18% y-y, 75% of FY target). Nevertheless, we have excluded JSMR’s plan to securitize its assets through creation of REIT or limited investment funds in our forecast as we now believe that JSMR would have sufficient cash flow in 2016-17F due to the CPF scheme.

Upgrade to BUY with 24% upside potential. We believe that improving profit outlook should be seen as positive news. After considering the share dilution from rights issue, we slightly lower our target price from Rp5,300 to Rp5,175. Note that we have considered a 25% discount to our DCF-based methodology (WACC: 9.7%) for margin of safety. Risks to our call are higher financing costs, unexpected delay in land acquisition, and unfavorable ruling in ongoing litigation case.

§ New toll-road projects support long-term earnings growth: As a domestic toll-road company with the greatest operating assets (61% market share), JSMR will likely benefit from President Jokowi’s push to accelerate toll-road projects. By 2020, we expect JSMR to operate 30 toll-road concessions (currently: 19) with a total length of 1,224km, up 106% from present levels of 593km. Apart from such large projects in its pipeline, JSMR plans to initiate two Jakarta-Cikampek expansion sections to complement the current Jakarta-Cikampek toll road, which carries the most traffic and generates the highest revenue for JSMR, providing earnings support ahead. This note marks a transfer of analyst coverage.

§ Margin support from e-money and low interest rates: In the next few years, JSMR plans to increase its revenue proportion from e-money toll stations to 80% in 2018 (23% as of 1H16). This would lower personnel costs (20% of JSMR revenue) by around 30%, improving the company’s cost structure in the long run. In 2017, JSMR expects its e-money revenue proportion to reach 50%. Furthermore, we expect lower interest rates ahead to support JSMR’s net profit given its substantial 2017 net gearing of 193%. That said, JSMR plans to lower its 2017 interest cost from around 10.4% to 9.0% through several refinancing initiatives. With lower interest rates, we expect JSMR’s interest coverage to hover around 2x in 2017-18.

§ Lower capex requirement on innovative payment structure: In 2017, we expect JSMR to spend capex amounting to IDR18tn (+73% y-y), to fund expansion of several toll-road projects. JSMR plans to structure capex for several toll roads such as Batang-Semarang, Samarinda-Balikpapan, Jakarta-Cikampek Elevated, Pandaan-Malang and Manado-Bitung using turnkey-CPF-and-LC schemes in order to minimize cash outlays for its investments in 2017. Thus, JSMR’s cash flow should be well-supported. On depreciation, JSMR will continue to use a traffic-based depreciation method, which lowers depreciation expenses for some new toll roads in the first few years while their traffic carried is still low. This will likely support JSMR’s bottom line as 7 new toll roads will become operational in 2017.

Ensuring longer term growth through IDR1.8tn rights issue
In order to ensure longer-term growth, JSMR is in the midst of conducting its rights issue in December 2016 with pricing set at IDR3,900, translating to a total fund raising of IDR1.8tn. JSMR will direct the proceeds towards three new toll-road projects: Balikpapan-Samarinda, Manado-Bitung and Jakarta-Cikampek elevated toll roads. On earnings, we expect JSMR’s 2017F revenue of IDR9.6tn (+10% y-y) and 2018F revenue of IDR11.2tn (+16% y-y) to result in 2017F net profit of IDR1.9tn (+8% y-y), before growing 8% y-y to IDR2.0tn in 2018F. In terms of dividends, JSMR plans to raise its dividend payout from 20% to 30%, allowing for 2017 dividend yield of 1.9% (market’s 2.6%). On valuation, our new IDR5,287 Theoretical Ex Rights Price (TERP) 12-month TP implies a 2017F PER of 22.5x, a 25% discount to its past-5-year average forward PER. BUY with 26% upside potential to our TP. Risks: Lower-than-expected traffic growth and execution delays of its toll-road projects.

Jasa Marga ($JSMR) has announced rights issue price of IDR3,900. According to IDX, the JSMR rights issue ratio was 500,000:33,667 which means every owner of 500,000 old shares has the right to purchase 33,667 new shares. (Bareksa.com)

Bahana comment: SCMA's removal from the syariah index has been well flagged by management in the past couple of months, given the company's strong revenue growth coming from the tobacco sector (non-halal), which accounts for more than 10% of total revenue. Note that competitor $MNCN is also not inside the Syariah index list.

Jasa Marga ($JSMR) launched a rights issue of 457.87 mn new shares where shareholders is entitled to 33,667 subscription rights for 500,000 shares held. The subscription price is Rp3,900 per share. Assuming full subscription, the total issue proceeds amounts to Rp1.78 tn. Along with the plan, around 50% of proceeds will be used for Batang-Semarang toll road project (75 km), 30% for Pandaan-Malang toll road (38 km) and the remaining 20% of the proceeds raised from right issue will be allocated for Jakarta-Cikampek toll road project (64 km). Cum-right and ex-right date will be on 25 and 28 November, respectively. The shares are traded including the right to participate in the rights issue between 2 and 8 December 2016.

Comment : We are positive with JSMR’s right issue plan which should help strengthen the balance sheet and working capital. We believe this rights issues will give JSMR more room to expand. Based on last price (21/11), TERP will be at Rp4,200. We still maintain BUY for JSMR with TP Rp6,500.

The Indonesia Toll Road Authority (BPJT) would present two new toll road projects (Sukabumi-Ciranjang-Padalarang and Jogyakarta-Bawen) to investors in Asean G2B Infrastructure Investment Forum. Meanwhile, BPJT have also received proposal from local investors to develop 3 other toll road projects, Semanan-Balaraja, Kamal-Teluknaga-Balaraja and Bojong GedeYasmin-Ciawi. Total investments for the 5 toll roads are expected to reach upwards of Rp53tn while the projects tender would be conducted in 2017. (Bisnis Indonesia)

Ministry of Public Works and Housing has allocated guarantee funds for toll-road investors claiming for delayed land acquisition. The fund would be transferred in cash by the Indonesia toll-road authority to avoid longer concession or higher toll-tariffs. Recently, the Balikpapan-Samarinda, Manado-Bitung, BatangSemarang and Pandaan-Malang toll-road project guarantees have already been allocated. (Investor daily)

PT Jasa Marga ($JSMR) aims to operate 90.2km Solo-Ngawi toll road before the Ramadan in June 2017. The operation will be function with no tariff charge until official operation in October 2017. Currently, land acquisition has reached more than 90% with construction less than 50% on average.

Jasa Marga ($JSMR) is estimating the Jakarta-Cikampek Elevated rail project investment would amount to IDR16.4tn with 36.4km of length. However, JSMR has 60% ownership of the project with a 45-year concession, while the remaining 40% is owned by Waskita Karya ($WSKT). (Bisnis Indonesia)

Effects of a shallow FX market; Buying opportunities exist
Based on Bank Indonesia’s data, ytd the average daily turnover for the IDR spot market is only USD1.7bn, which is shallow by regional standards, reflecting just 0.5x of GDP (exhibit 1), one of the lowest among its regional peers. Even worse is the 1M NDF market, which only trades at USD0.7bn a day ytd. Unfortunately, the NDF sometimes can influence the spot market, particularly on pressure stemming from the recent Trump election. However, given such illiquidity, we advise investors to remain calm, particularly as we believe the fundamentals in Indonesia remain largely unchanged. We note that, through years of balance sheet repair since the 1998 Financial Crisis, the Indonesian stock market’s net gearing has improved from more than 150% back then to 27.3% in 9M16. Furthermore, we believe Indonesia is currently in a good position given that its 3Q16 CAD of 1.86% is the lowest since 1Q12. In fact, we think the current situation presents buying opportunities for investors as we expect the IDR to become stronger by year-end. It is worth pointing out that there should still be around USD10bn to come in from tax amnesty repatriation between now and the end of 2016.

Sensitivity analysis: 1% weaker IDR = 0.9% market EPS
Given recent IDR gyrations, we present our latest currency sensitivity analysis on the IDR/1USD, in an effort to aid investors in better gauging their investments in Indonesia. Our study, based on 87 non-financial stocks under our coverage (62% of total JCI market capitalization), shows that each 1% IDR depreciation could lower the EPS of our covered stocks by 0.9% overall (exhibit 5). That said, it is not a surprise that a recent 3% negative swing in the NDF market spooked investors, as it could translate into a 3.6% wipeout in 2017 market EPS growth.
Winners: Coal, Metals, Oil & Gas and Plantations
A stronger dollar should in general spell good news for sectors with dollar revenue such as Coal, Metals and Oil & Gas and Plantations (exhibit 5). By stock, our sensitivity analysis indicates that $SIMP, $WINS, $TBLA, $PTBA and $SGRO should be the major beneficiaries of IDR deprecation within our basket of stocks (exhibit 2).

Losers: Poultry, Property and Consumer Discretionary
Against a backdrop of a weaker IDR, sectors with large USD costs and borrowings should suffer: Poultry, Property and Consumer Discretionary (exhibit 5). Stock-wise, losers of a stronger dollar include heavily leveraged companies under our coverage: $SMCB, $LPKR and $MAPI (exhibit 3).
Safe havens: Mainly Construction and Telcos
For investors seeking shelter from currency volatility, we point to the Construction and Telco sectors (exhibit 10 & 24). In terms of stocks, $JSMR, $SCMA, $SIDO and $WSKT (exhibit 4) should have their earnings relatively least altered by FX swings.

Rini Soemarno, the Minister of State Owned Enterprises, stated that all the Government Regulation (PP) has been approved which should pave way for rights issue of Wijaya Karya ($WIKA), Jasa Marga ($JSMR), Krakatau Steel ($KRAS) and Pembangunan Perumahan ($PTPP). For $WIKA, the rights trading date would occur on 17-23 November 2016 while $JSMR’s rights trading date would happen on 1-7 December 2016. On separate occasion, the SOE Ministry is also considering IPO of Brantas Abipraya, a state-owned construction company

- Lagging progress in new toll road construction. JSMR’s intangible assets (toll road concession and pre-construction land) rose to Rp31.4tn in 2Q16 (1Q16: Rp29.7tn) which translates that JSMR has spent Rp2.6tn for new toll road construction in 2016. We believe that delay in land clearing progress in several toll roads (especially in Greater Jakarta area) has caused delay in new toll road construction. As a result, we maintain our JSMR’s capex forecast of Rp6.9tn in 2016 as well as our NEUTRAL call with TP of Rp5,300.

- +9% gains in MSCI Indonesia since our country upgrade in July - Since our upgrade of Indonesian equities to overweight two months ago in the MIG publication after clarity on its tax amnesty programme emerged, sentiment has further improved following the appointment of well respected Finance Minister Sri Mulyani Indrawati. The Indonesian equity market has seen strong equity inflows in 3Q16 lifting the index up ~9% (local currency terms, +8.2% in USD), which has outpaced world equities’ gains (+5.2%) for the same period and supported our call.

- Year to date’s gains of +18.6% has also more than recouped 2015’s losses of -12%, which has supported the turnaround highlighted in our January 2016’s South East Asia Equity Strategy report. The equity market rally year to date has been supported by a benign environment of lower interest rates, stable IDR currency vs the USD, under-owned positions in global portfolios and improving confidence in Indonesia’s recovery story. Estimated equity inflows into Indonesia so far for 3Q has exceeded the total inflows for 1H16, driving the market to new highs. Since mid May this year, it is estimated that net equity inflows reached $1.7bln, vs $1.6bln net outflows over the whole of 2015 (source: JPM estimates).

- Near term positives post amnesty and cabinet reshuffle look priced in, valuations are now close to 10 year high – At 16x PER, Indonesian equities is now trading close to +2 standard deviations to its 10 year historical average multiple and at its highest valuation level since 2007, which we believe has priced in much of the near term positives. Although near term liquidity is likely to remain supportive given benign expectations on interest rates, we caution that valuations have caught up and believe it is prudent to start taking some money off the table. On domestic updates, while the recently released 2017 budget is credible, it is unlikely to lead to further corporate earnings upgrades given a moderate government spending target of 6% (planned fiscal deficit for 2017 is 2.4% of GDP, flat/lower than 2016E). Towards the end of September and December which marks the first and second phases of the tax amnesty programme’s staggered tax rates for declared wealth, investor sentiment may also be influenced by expectations over the tax collections.

- Muted start to the 9-month tax amnesty programme, although still early days - As of 23rd August 2016, the asset declaration in the Tax Amnesty Program has reached Rp51.7tn, consisting of 85% onshore/15% offshore assets (12% overseas assets declared, 3% overseas net assets repatriated), while asset repatriation has reached Rp1.6 tn. Momentum of onshore assets declared in first half of August has picked up, with the tax office reporting about Rp11.5tn worth of onshore assets declared (>4x July’s). About three-quarters of the assets declared were from private individuals, and the balance private entities, which we view as supportive of property sector’s recovery given interest rates are expected to remain low while the Ministry of Finance has allowed repatriated funds to be invested in real assets (such as property and gold).

- Looking ahead, earnings upgrades need to pick up momentum for the rally to have more legs - Earnings wise, the recent 2Q results season was mixed with single digit corporate top line growth from a year ago. Concerns on banks remain dragged by asset quality issues while commodity related earnings have been moderate. Following the latest 2Q earnings season (where consensus earnings were trimmed -2% lower for FY16E and FY17E), FY16E and FY17E earnings are now forecast to grow +7% and +14% respectively (higher than Asia ex Japan equities’ 2.2% FY16E and 11% for FY17E respectively) which we believe is priced in current valuations.

Time to lock in some profits – Switch out of names which have rallied and offer no upside to target prices- Sectors we are cautious on are: Commodity related plays which have rallied and priced in recovery expectations (coal – Bukit Asam, ITMG, palm oil – Astra Agro, London Sumatra), Banks (loans growth will be moderate while we expect asset quality concerns to remain a near term overhang) and Utilities (in particular, Perusahaan Gas – where we think profitability will remain pressured by regulatory efforts to lower gas prices).

Preferred Picks/Switch Ideas

- Preferred Sectors we would accumulate new positions are: Property (Bumi Serpong – Western Jakarta play, large landbank catering to middle income buyers), Telecommunications (Telekomunikasi Indonesia – improving smartphone penetration and data usage supported by a young population), Consumer (Indofood and Media Nusantara, which benefit from an improving domestic economy in 2H16) and Infrastructure (Jasa Marga – No. 1 toll road operator, long term beneficiary of infrastructure development in Indonesia).

- Risks to the current rally include weaker than expected global economy, faster than expected Federal Reserve interest rate hikes which may result in global liquidity volatility and disappointments in the domestic recovery and infrastructure spending pace (continues to be a focus in the 2017 budget, with 9% yoy expected growth).

- Higher oil price will reduce fiscal deficit — The Indonesian government now expects incremental revenue from the recent bounce in oil price to ~US$50/bbl. Despite Indonesia is a net importer of oil & gas, fiscal deficit could decline by Rp0.1- 0.9trn based on government’s calculation for every US$1/bbl of oil price increase. The government is currently using an oil price of US$35/bbl in their 2016 proposed budget and thus with higher oil prices, they should receive additional revenue from the oil & gas sector.

- Gasoline being sold at c.US$50/bbl equivalent after taking into account the distribution margins of Pertamina — The current price of gasoline at Rp6,550/litre translates to c.US$48-50/bbl of oil prices. Thus the government is already at a comfortable level in terms of the selling prices of gasoline, and should see no pressure to increase the prices unless the oil prices were to increase to a higher level, say US$55-60/bbl. At Rp6,550/litre, Pertamina is making a distribution margin of Rp1,010/litre, as per government calculations (see Fig 1 for government’s detailed calculation of fuel prices).

- Non-subsidized fuel (RON97) in Malaysia is cheaper vs that in Indonesia — RON95 gasoline price in Indonesia (Rp8,250/litre) is +22% higher than RON97 price in Malaysia (Rp6,715/litre). The RON97 in Malaysia is a non-subsidize fuel while the RON95 is still being subsidized and sold at Rp5,575/litre.

- Tax amnesty is still on schedule to be passed in June 2016 — We see such an outcome as not being priced in by the market (see our recent Indonesian strategy note - Still Positive: Spotlight on Five Key Issues for Market). The parliament head of commission XI, Ahmadi Noor Supi, mentioned that tax amnesty bill will not get delayed since it is a critical part of the government’s 2016 budget revision. As per the government, they have included proceeds amounting to ~Rp103trn (US$7-8bn) from the tax amnesty bill in the 2016 revised budget.

- Maintain our positive view on the market — At a 1-year forward PER of 15.1x, the JCI is not cheap but nor does it look overly expensive, and we maintain our 5,700 target (+16%) set last October. Sector-wise, we continue to like property, construction and infra. $ASII rejoins our top picks and we see more value in banks as gainers from the expected passage of a tax amnesty bill. Top picks: $BBNI, $BBTN, $LPPF, $TLKM, $ASII, $MIKA, $PTPP, $ADHI, $BSDE, $CTRA, $PWON and $JSMR.

JSMR as initiator of Jakarta-Cikampek Elevated toll road is looking for a strategic partner to join the tender. JSMR will eye for a majority stake in the project (60%). The company hopes that tender process can start in June this year with 2 years construction period. Capacity of current Jakarta-Cikampek section is quite tight which causes traffic jam at Cikunir interchange. Investment is expected at Rp12-17tn for the project. JSMR also proposed Jakarta-Cikampek II South section to the gov’t but gov’t puts priority on the elevated section given minimal need for land clearing. Both projects are already approved by Public Works Ministry.

- ASEAN is made up of over 600 million people living within the region, with a combined GDP of $2.6 trillion, making it the 7th largest economic bloc globally and 3rd largest in Asia, while its labour force is the third largest globally after China and India.

- Underbuilt and growing from low base - On a per capita basis, ASEAN nations have only a small proportion of the roads and railways found in OECD countries, with significantly lower electricity, clean water and sanitation. For example, for every 1000 people in ASEAN, an estimated 10km of roads have been built, a far cry from the ~200km of roads per 1000 people in economically advanced countries (source: ADB).

- Infrastructure needs - ASEAN needs an estimated $100bln yearly in investments to address its infrastructure needs, but is currently investing less than the amount, which results in infrastructure bottlenecks and high logistics costs for businesses.

- Encouraging signs of regional efforts and policies moving in the right direction - With the region’s sizable private savings and foreign exchange reserves, regional efforts are ongoing to address the under-built infrastructure status through multiple infrastructure projects on roads, railways, power, clean water supply and other critical infrastructure.

- While the process will take time with funding & execution risks, investor expectations are low. The structural story is attractive from a multi-year perspective, while increases in near term pump-priming by regional governments to stimulate the economies will act as a positive growth cushion against external macro headwinds.

SEA equity markets added on to gains in March with improving foreign inflows, as risk appetite improved following some stabilization in China and a weaker USD from delayed Fed hike rate expectations. With a dovish Fed and likely tightening only in June, investor concerns on the global economic recovery are expected to ease further near term, which will be supportive of risk assets.

Within the region, we view Indonesia and Philippines as offering relatively stronger structural growth stories. Apart from infrastructure plays such as Jasa Marga ($JSMR), sectors we favour in Indonesia include the property sector where we see potential catalysts from improving presales helped by a lower interest rates environment and progress in the government’s tax amnesty programme. We highlight Bumi Serpong ($BSDE), which is well positioned to benefit from a recovery in property demand while valuations remain undemanding. We also favour market leader Telekomunikasi Indonesia ($TLKM) following more rational competition in the telecommunications sector. With a stable earnings outlook driven by continued growth in voice and data revenues, we view TLKM as a core holding within the SEA telecommunications sector.

Incoming data releases from the Philippines indicate that domestic demand trends remain on a positive track in 1Q16. January’s remittances growth was also broadly in line with trend, growing 3.4% yoy (vs 2015’s 4.1% growth). The next key event domestically is the upcoming elections in May where we expect election rhetoric to cast some uncertainties in the equity market. Post elections, we expect the gradual reform pace to be maintained and highlight Ayala Corp as one of our preferred large cap picks to accumulate on weakness, which offers a portfolio of stable and growth companies leading in their respective sectors and well positioned to benefit from the country’s economic growth

Jasa Marga plans to increase its other non-toll road revenue to 15%-20% in 2016, vs. previously below 10% in 2015. JSMR CEO mentioned that its subsidiary can provide maintenance to JSMR’s toll roads, so that JSMR does not need to appoint external parties in maintaining its toll roads. However, JSMR mentioned the services must reach to the agreed level.

Jakarta gov’t plans to levy land building taxes (PBB) on lands that have been used for toll roads. $JSMR, Jakarta Outer Ring Road (JORR) operator, requested for Rp4bn of gov’t guarantee as compensation of govt’s request to open the toll gate to Pulogebang terminal, East Jakarta. JSMR requested the Rp4bn as a guarantee if JSMR incur losses from the operation of the toll gate. Previously, JSMR has been granted 50% discounts in PBB taxes. However, with the new request, Ahok decided to give the Rp4bn guarantee but scrapping the PBB discounts